Econ Final

According to the World Bank, real per capita income in the U.S. increased from $57,640 in 2015 to $58,030 in 2016. What was the approximate annual growth rate? A) 0.7% B) 1.0% C) 6.8% D) $390

A) 0.7%. (The growth rate can be calculated using the equation in Unit 1.3. Here, the growth rate = ($58,030-$57,640)/($57,640)=0.007 or 0.7%).

Which of the following might help to minimize the costs of adapting to new technology? A) Strict regulation of new state-ups. B) Government re-training schemes. C) A poorly developed financial sector. D) A shortage of skilled labor.

B) Government re-training schemes.

In an economy where the MPC is 0.7, the proportional tax rate is 0.25 and the marginal propensity to import is 0.2, the multiplier will be: A) 0.675. B) 2.1. C) 1.48. D) 2.35

C) 1.48. (The value of the multiplier in this case is: 1/(1-0.7(0.75))+1/(1-0.525)+2=1.48).

Compared with investment spending, government spending is relatively stable. Why might this be? A) A large part of government spending is on transfers (benefits and pensions) which are 'contractual' and have to be paid whatever the state of the economy. B) The government can spend what it likes'. C) Much of government spending is independent of the state of the economy. D) Government spending is constrained by international agreements.

C) Much of government spending is independent of the state of the economy.

The historical process which led to requiring fewer inputs to produce the same output is referred to as A) Capitalism. B) Specialization. C) The technological revolution. D) History's hockey stick.

C) The technological revolution. (The Industrial Revolution launched the permanent technological revolution in Britain around 1800).

People are more productive when they specialize (focus on a limited range of activities) due to: A) Difference in ability. B) Learning by doing. C) Economics of scale. D) All of the above.

D) All of the above.

Which of the following would increase GDP? A) A decline in imports, holding all other components of GDP constant. B) An increase in remittances paid to domestic residents by relatives living abroad. C) A decrease in government spending. D) A decline in exports.

A) A decline in imports, holding all other components of GDP constant.

Which of the following statements regarding Adam Smith are correct? A) Adam Smith claimed that coordination among large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it. B) Adam Smith advocated that economic agents were guided entirely by self-interest. C) Adam Smith argued that all markets were characterized by perfect competition. D) Adam Smith believed there should be no government involvement in the economy.

A) Adam Smith claimed that coordination among large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it. (This is Adam Smith's idea of the "invisible hand": "It is not from the benevolence of butcher, the brewer, or the baker that we expect our diner, but from their regard to their own interest, led by an invisible hand to promote an end which was no part of his intention.").

If the Federal Reserve increases the reserve requirement, then: A) Banks are required to hold a greater amount in reserves, and they have less money available to lend out. B) Banks are allowed to hold a smaller amount in reserves, they will have a greater amount of money available to lend out. C) Banks will not change their lending behavior. D) Banks are required to hold a greater amount in reserves, and they have more money available to lend out.

A) Banks are required to hold a greater amount in reserves, and they have less money available to lend out.

When the Federal Reserve wants to change the money supply, it most commonly: A) Conducts open market operations. B) Changes the discount rate. C) Changes the reserve requirement. D) The Federal Reserve cannot change the money supply.

A) Conducts open market operations. (Conducting open market operations, like selling or buying bonds, is the most common way that the Fed changes the money supply).

Which of the following statements is correct regarding measuring GDP? A) GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production. B) Both exports and imports are included in the measurement of GDP. C) Government production is not included in the GDP. D) The value added of government production is computed using the price that public goods and services are sold at in the market.

A) GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production. (These three different measures of GDP are discussed in Section 13.4).

The 'paradox of thrift' refers to the fact that: A) If we all save more, aggregate income will fall. B) The wealthier I become, the more tax I have to pay. C) Saving is a waste of time. D) Inflation erodes the value of savings.

A) If we all save more, aggregate income will fall. (If an individual reduces his/her consumption in order to same more, he/she will usually be successful. But if we all save more, this reduces the level of aggregate demand. This in turn will reduce the level of employment and total income. Since saving (and consumption) depend upon the level of income, the fall in income will reduce the total level of saving. Hence a general attempt to save more leads to the paradox that less actually saving takes place).

Which of the following statements is correct regarding the model of the labor market? A) In the short- and medium-run models the amount of capital is fixed, while in the long-run model the amount of capital can vary. B) Labor-saving technological progress raises unemployment in both the short and long run. C) In the long-run model, the markup is independent of the number of firms. D) In the long-run model, firms enter the market when the markup is low.

A) In the short- and medium-run models the amount of capital is fixed, while in the long-run model the amount of capital can vary.

Deflation refers to a situation where prices are generally falling. Why is deflation generally undesirable? A) It might lead to a reduction in aggregate demand as firms and households wait for prices to fall further. B) It disadvantages creditors. C) It reduces the value of debts. D) It redistributes real income.

A) It might lead to a reduction in aggregate demand as firms and households wait for prices to fall further. (If prices are falling, consumers may postpone planned spending because they think that prices will be even lower in the future. If this happens, aggregate will fall. This may increase deflationary pressure, causing further price falls and creating a circular, cumulative, process that is very difficult to break out of).

The Federal Reserve does all except which of the following? A) Make loans to individuals. B) Control the supply of money. C) Control the value of money. D) Regulate the banking system.

A) Make loans to individuals. (This is the responsibility of individual banks, not the Federal Reserve).

What does US GDP per capita measure? A) The total output of the US's economy, divided by the country's population. B) The total output of Washington DC's economy. C) The average disposable income of a US resident. D) The total output of the US residents, divided by the number of the residents.

A) The total output of the US's economy, divided by the country's population. (This is the correct definition of GDP per capita as defined in Section 1.2).

If the Federal Reserve lowers the discount rate it charges to banks, then: A) banks will increase their borrowing of reserves from the Fed and thus increase money supply. B) banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, increasing the money supply. C) banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, decreasing the money supply. D) banks will increase their borrowing of reserves from the Fed and thus decrease money supply.

A) banks will increase their borrowing of reserves from the Fed and thus increase money supply.

According to the revised version of the Phillips curve, as shown in Figure 15.7, if the rate of inflation last year was 3 percent and the bargaining gap this year and next year is 1 percent, then inflation this year and next year will be: A) 3% then 4%. B) 4% then 5%. C) 4% then 3%. D) 3% then 2%.

B) 4% then 5%.

Imagine an economy that grows at a constant rate for the 21st century. A plot of the level of GDP over time will fit: A) A straight upward-sloping line on a linear scale, and a convex line on a linear scale. B) A convex line on a linear scale, and a straight upward-sloping line on a ratio scale. C) A concave line on a linear scale, and a straight upward-sloping line on a ratio scale. D) A downward-sloping line on both a linear scale and a ratio scale.

B) A convex line on a linear scale, and a straight upward-sloping line on a ratio scale. (As explained in Unit 1.3., a series that grows at a constant rate looks like a convex line on a linear scale and a straight upward-sloping line on a ratio scale).

Since 2008, we have gotten used to the idea that the size and behavior of the financial system can be a major source of economic instability. How can the existence of a developed financial system may help to limit fluctuations in the economy? A) A developed financial system means that firms and households can always borrow. B) A developed financial system can help households to 'smooth' their consumption over time. C) A developed financial system facilitates government borrowing. D) A developed financial system provides facilities for trading currencies and for lending and borrowing overseas.

B) A developed financial system could help households to 'smooth' their consumption over time.

An overseas bank announces that it is introducing a new type of savings account paying a 3 percent fixed rate of interest for deposits of one year duration. This 3 percent is: A) A real rate of interest. B) A nominal rate of interest. C) A post-tax rate of interest. C) A long-term rate of interest.

B) A nominal rate of interest.

Cuts in public expenditure do not guarantee a reduction in the government's deficit because: A) Firms will try to pay less tax. B) Aggregate demand will fall, reducing government revenue. C) Aggregate demand falls, and firms invest less. D) There is a fall in autonomous consumption.

B) Aggregate demand will fall, reducing government revenue. (The cuts in public spending constitute a reduction in the autonomous components of aggregate demand. Through the multiplier, we must expect a fall in aggregate demand somewhat larger than the initial cut in public spending. With the fall in aggregate demand, output, and employment, there will be a fall in government revenue as fewer workers pay tax and firms pay less tax on their lower profits).

Which of the following statements about the wage-setting curve is correct? A) The wage-setting curve depicts the workers' reservation wage from different levels of economy-wide employment. B) At each point on the wage-setting curve, the workers are choosing their best response effort level given the real wage and unemployment rate. C) A lower unemployment rate shifts the wage-setting curve down. D) A higher unemployment rate shifts the wage-setting curve down.

B) At each point on the wage-setting curve, the workers are choosing their best response effort level given the real wage and unemployment rate. (The wage-setting curve depicts the real wage necessary to provide workers with incentives to work hard (which is higher than their reservation wage), for different levels of economy-wide employment).

The wage-setting curve shows that at relatively low levels of unemployment, economy-wide real wages will be relatively: A) Low. B) High.

B) High. (At low levels of unemployment, real wages will be relatively high).

Temporary change in income affects the current consumption of credit-contained households more than unconstrained households because: A) A credit-constrained household is unlikely to have savings to fall back on. B) If the household cannot borrow, its current consumption is limited by its current income. C) A credit-constrained household cannot foresee the future. D) Credit-constrained households are likely to be shortsighted.

B) If the household cannot borrow, its current consumption is limited by its current income. (Foreseeing the future is difficult for everyone. It is not peculiar to credit-constrained households. The problem with credit constraints is not that they prevent one from looking ahead, but that they prevent one from taking action to deal with what one foresees).

Suppose that everyone who had been looking for a job for more than six months gave up in despair and stopped looking for a job. What would happen to the unemployment rate? A) It would increase. B) It would decrease. C) It would not change. D) It would change, but the effect cannot be predicted.

B) It would decrease. (If unemployment individuals stop looking for a job, that means they are now no longer 'unemployed' but now merely out of the labor force. This means the unemployment rate would fall. This is an issue in that many might see this as a sign of macroeconomic improvement, but these individuals still do not have work).

The introduction of a new labor-saving technology results is: A) Higher wage share of output and higher income inequality in the short run. B) Lower wage share of output and higher income inequality in the short run. C) Lower wage share of output and lower income inequality in the short run. D) Higher unemployment, lower wage share of output, and higher income inequality in the long run.

B) Lower wage share of output and higher income inequality in the short run.

Which of the following statements are correct? A) Your material wealth is the largest amount that you can consume without borrowing, which includes the value of your house, car, financial savings, and human capital. B) Net income is the maximum amount that you can consume and leave your wealth unchanged. C) In economics, investment means saving in financial assets such as stocks and bonds. D) Depreciation is the loss in your financial savings due to unfavorable movements in the market.

B) Net income is the maximum amount that you can consume and leave your wealth unchanged. (Net income is the flow that corresponds to your stock of wealth, so if you consume it all your wealth is unchanged).

Which of the following is correct? A) In the credit market, asymmetric information regarding the quality of the project leads to a principal-agent problem where the borrower is the principal and the lender is the agent. B) Providing collateral is a signal to the lender that the project is of sufficient quality to succeed. C) Borrowers whose limited wealth makes it impossible to get a loan at any interest rate are termed 'credit-constrained'. D) The amount that the lender puts into the project is called the equity.

B) Providing collateral is a signal to the lender that the project is of sufficient quality to succeed. (Providing collateral is one way to reduce the principal-agent problem. It provides the borrower a great incentive to work hard, and gives the lender the signal that the borrower thinks that the project is of sufficient quality to succeed).

Unemployment is a stock. The size of the stock will increase if: A) The rate of job destruction is 4% per year and the rate of job creation is 5% per year. B) The rate of job destruction is 2% per year and the rate of job creation is 1% per year. C) The rate of job destruction is 4% per year and the rate of job creation is 4% per year. D) The government restricts access to unemployment benefits.

B) The rate of job destruction is 2% per year and the rate of job creation is 1% per year.

Which of the following statements regarding fiscal policy is correct? A) Expansionary fiscal policy (e.g. increasing the government deficit or reducing the surplus) always has a stabilizing effect on the economy. B) Unemployment benefits and a proportional tax system are both automatic stabilizers. C) In a recession, the aim of a government fiscal expansion is to override the effects of automatic stabilizers. D) As a family worried about mounting debts should cut spending and save more, so should an economy adopt austerity measures when it debt level is high, to restore its public finances to balance.

B) Unemployment benefits and a proportional tax system are both automatic stabilizers. (In the case of an economic downturn, unemployment benefits increase (thus increasing government spending) and taxes are reduced. In the case of an economic boom, unemployment benefits decrease (thus decreasing government spending) and taxes are increased. These are therefore automatic stabilizers).

Which of the following cases would the wage-setting curve shift up? A) Better monitoring by the employer. B) Lower unemployment rate. C) A more generous unemployment insurance scheme. D) A sudden influx of immigration.

C) A more generous unemployment insurance scheme. (A more generous unemployment insurance scheme improves response function curve shifts to the right. This raises the firm's profit-maximizing wage level (the wage at which the firm's isocost is tangent to the best response function curve) at each employment rate, so the wage-setting curve shifts up).

Which of the following is likely to lead to a fall in the level of investment spending? A) A rise in interest rates and increased optimism about future demand. B) An easing of monetary policy by the central bank. C) An official forecast of a downturn in the economy. D) A rise in the expected rate of profit.

C) An official forecast of a downturn in the economy.

Assume that a household has access to credit. Which of the following is likely to have a significant effect on long-run consumption? A) A temporary reduction in income. B) A rise in interest rates. C) An unexpected promotion to a senior position. D) A freeze in the value of the state retirement benefits.

C) An unexpected promotion to a senior position. (A promotion to a senior position is likely mean an increase in future income over a long period. (This promotion may lead to others). If it was expected, then it might already have been taken into consumption plans and have little effect. But if it was unexpected then it is very likely to increase consumption).

Which of the following statements about the price-setting curve is correct? A) The price-setting curve simply depicts the firms' profit-maximizing price level for different levels of economy-wide employment. B) Firms have to pay a higher real wage when the employment rate is higher. Therefore the price-setting curve is upward-sloping. C) At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level. D) At points above the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level.

C) At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level. (Recall that the price-setting curve represents the profit-maximizing real wage. At points above the price setting curve, the real wage is too high. When the real wage is too high, it means the markup (and thus the price) is too low. See figure 9.10 in the text for a refresher).

Why is investment spending likely to be more volatile than consumption spending? A) Because investment depends entirely on 'animal spirits'. B) Because firms cannot foresee the future. C) Because a large part of consumption spending is on items that cannot be postponed. ('non-discretionary')-food, heating, lighting, shelter, for example). D) Interest rates fluctuate.

C) Because a large part of consumption spending is on items that cannot be postponed. ('non-discretionary')-food, heating, lighting, shelter, for example. (These items include food, heating, lighting, shelter, for example. Such spending is sometimes referred to as 'non-discretionary' spending).

Which of the following statements is correct? A) Human capital is the physical capital owned by humans. B) Wealth and income are both stock variables. C) Depreciation is a flow variable. D) Net income is before-tax income minus tax in.

C) Depreciation is a flow variable.

Imagine that the rate of inflation has been 10 percent per year for a number of years. The central bank then introduces a 'tight' monetary policy and the rate of inflation comes down to 5 per cent per year. This reduction is an example of: A) Deflation. B) Falling prices. C) Disinflation. D) Austerity.

C) Disinflation. (Disinflation refers to a situation where inflation (the rate of change of increasing prices) is being reduced.

Which of the following statements is correct regarding disposable income? A) Disposable income is the amount of income that is given away. B) Disposable income is total income from wages, profit, rent, and interest. C) Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions. D) Disposable income is the exact measure of one's wellbeing.

C) Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions. (Disposable income is total income minus transfers to others such as taxes, which is the maximum amount of possible expenditure without borrowing or selling.)

In periods of rapid inflation, which of the following groups tend to lose out? A) Low-income households. B) Households with substantial financial wealth. C) Borrowers (debtors). D) Lenders (creditors).

D) Lenders (creditors). (Generally speaking, loan contracts specify a nominal amount that has to be repaid at some point in the future. The higher the rate of inflation, the lower is the real value of this amount of repayment. Lenders lose out because the amount that they receive when the loan is repaid has a lower real value that when it was lent).

Economic activity is subject to fluctuations (booms and slumps). Thinking about the US economy since the 1800's which of the following statements is correct? A) The main cause of economic fluctuations over the years has been the size of the agricultural sector and the effects of weather. B) The main cause of economic fluctuations over the years has been the speculative nature of the financial system. C) In the early nineteenth century the effects of weather on a large agricultural sector were a major source of economic fluctuations but during the twentieth century these have been replaced by fluctuations industrial investment. D) In the nineteenth century, bank failures (and the absence of a central bank) were the main causes of economic fluctuations.

C) In the early nineteenth century the effects of weather on a large agricultural sector were a major source of economic fluctuations but during the twentieth century these have been replaced by fluctuations industrial investment.

Which of the following variables has NOT followed the so-called 'hockey-stick' trajectory? Recall, the 'hockey-stick' trajectory refers to graphs which illustrate that there has been little to no growth for most of history, followed by a sudden and sharp change to a positive growth rate. A) GDP per capita. B) Labor productivity. C) Inequality. D) Global carbon emissions from burning fossil fuels.

C) Inequality. (There is no unidirectional trend in inequality over time. While early hunter-gatherer tribes were undoubtedly almost perfectly equal, economies in the modern era have varied from highly equal to highly unequal).

The Beveridge curve will shift downward (toward the origin) if: A) Vacancies are increasingly concentrated in given sector of the economy. B) Vacancies are increasingly concentrated in a geographical region. C) Information about job vacancies improves. D) Unemployment benefits become more generous.

C) Information about job vacancies improves. (The fact that workers cannot find the matching vacancies and employers cannot find the relevant workers is another reason why vacancies exist alongside unemployment. Helping the two sides to find each other result in more of the vacancies being filled at every level of unemployment, and so the Beveridge curve shifts down).

Capitalism is an economic system based on A) Private property. B) Private property and markets. C) Private property, markets, and firms. D) Markets and state-owned firms.

C) Private property, markets, and firms. (While many economic systems are built on private property and markets, capitalism is unique in that most people work for firms rather than for themselves).

A fall in the world price of commodities will: A) Shift the price-setting curve down and the Phillips curve up. B) Create a positive bargaining gap. C) Shift the price setting curve up and the Phillips curve down. D) Trigger accelerating inflation.

C) Shift the price setting curve up and the Phillips curve down. (If commodity prices fall, firms will make larger profits than they need and so competition will lower prices. The price level falls. This raises real wages so the price-setting curve moves up. This creates a negative bargaining gap. This gap will be eliminated if the level of unemployment falls, so that zero inflation is now associated with a higher level of employment The Phillips curve has shifted down).

A household's net worth (or equity) is best described as: A) The total value of its assets. B) The value of its house and other consumer durables. C) The total value of assets minus the total value of its liabilities. D) The value of its house minus the amount of the outstanding mortgage.

C) The total value of assets minus the total value of its liabilities. (Net worth is the difference between total (or gross) assets and total (or gross) liabilities).

Which of the following is a distinctive characteristic of 'inclusive unions'? A) They bargain for the highest possible wage, regardless of the consequences. B) They bargain for the maximum degree of job protection by the government. C) They set their wage demands in accordance with the productivity of labor. D) They aim to push up the wage curve regardless of productivity growth.

C) They set their wage demands in accordance with the productivity of labor. (Inclusive unions take account of their actions on other agents in the economic system. In particular, they accept that workers' productivity must be sufficient to supply the target real wage while leaving adequate profits for firms).

In the figure above, the data for Spain suggests that Okun's Law can be written as y=-0.3597x + 1.741. What is the predicted change in unemployment if GDP grows by 2%? A) Unemployment increases by 2.46 percentage points. B) Unemployment increases by 1.73. C) Unemployment increases by 1.02 percentage points. D) Unemployment increases by 1.67 percentage points.

C) Unemployment increases by 1.02 percentage points. (1.741 - 0.3597(2)=1.02).

Which of the following best describes the short-run relationship between inflation and unemployment? A) Unemployment falls; inflation falls. B) Unemployment falls; inflation falls at a faster rate. C) Unemployment rises; inflation falls. D) There is no relationship between unemployment and inflation.

C) Unemployment rises; inflation falls. (An inverse relationship or 'trade-off' means that inflation and unemployment move in opposite directions).

Which of the following statements regarding labor unions and wage bargaining is correct? A) Labor unions have no bargaining power when bargaining for their wages. B) A labor union can set both the wage level and the employment level. C) Unions may choose to restrain their use of bargaining power and will not ask for a wage lower than the firms' profit-maximizing level. D) The unions' bargaining power comes from their ability to shut down firms.

C) Unions may choose to restrain their use of bargaining power and will not ask for a wage lower than the firms' profit-maximizing level. (Demanding too high a wage may squeeze profits sufficiently, leading the firm to close down or cut back on employment. Therefore unions may choose to restrain their bargaining power).

The price-setting curve shows how output per worker is split between: A) Unions (dues) and workers (real wage). B) Firm owners (real profit) and unions (dues). C) Workers (real wage) and firm owners (real profit). D) None of the above.

C) Workers (real wage) and firm owners (real profit). (Recall that the price setting curve gives the real wage paid when firms choose their profit-maximizing price. See figure 9.9 for a refresher).

In an imaginary economy, GDP falls from $100 billion to $95 billion while output per worker rises from $5000 to $5020. In this economy there has been: A) An increase in production and a fall in productivity. B) An increase in production and an increase in productivity. C) A fall in production and a fall in productivity. D) A fall in production and an increase in productivity.

D) A fall in production and an increase in productivity. (There has been a fall in production but an increase in productivity per worker. In these circumstances, it is a reasonable inference that unemployment must have risen as well).

Interest rates can influence the macroeconomy by influencing: A) Household's decisions to borrow and spend. B) Businesses' decisions to invest in new projects. C) The attractiveness of holding equities. D) All of the above.

D) All of the above. (All of these answers influence the macroeconomy. When the interest rate is low, households pay less for borrowing and are more likely to borrow. Paying less in the interest rate also gives borrowers more money to spend. Business' are less likely to invest when the interest is high because they are paying more if the interest rate is high. If interest rates rises, then the risk free rate of holding equities rises).

Potential solutions to the principal-agent problem in the credit market include: A) Lenders refusing to lend. B) The borrower setting aside some collateral. C) The lender requiring the borrower to put some of her wealth into the project. D) Both b. and c.

D) Both b. and c. (Both solve the principal-agent problem. When the borrower sets aside collateral for a loan, it gives the loan giver more trust in the buyer and increases the likelihood that the buyer will get the loan. When the lender requires the borrower to put wealth into the project, they have the same trust established).

The Federal Reserve helps prevent bank runs by: A) Providing deposit insurance. B) Operating as banks' lender of last resort. C) Outlawing bank runs. D) Both by providing deposit insurance and by operating as banks' lender of last resort.

D) Both by providing deposit insurance and by operating as banks' lender of last resort.

It is often said that independent central banks are more likely to run a successful monetary policy than governments because their commitment to low inflation is more 'credible' than government promises. One reason for this is that: A) Independent central banks are better at economic forecasting. B) People who work in central banks have a strong dislike of inflation. C) Central banks can set interest rates. D) Central banks are less subject to political pressures (e.g. for lower unemployment) than governments.

D) Central banks are less subject to political pressures (e.g. for lower unemployment) than governments. (The argument for putting the decision in the hands of an independent central bank is based upon the view that central banks face fewer conflicts of interest, because they are not subject to political pressures. If inflation requires a very high (and unpopular) rate of interest, this is less of a problem for central banks than for governments whose electors may be more concerned about jobs).

The weakness of the original Phillips curve is that it ignored: A) Time. B) Household preferences. C) Policymaker preferences. D) Expectations.

D) Expectations.

When measured over time, the nominal value of many variables in economics grows more rapidly than their corresponding real values. Why might this be? A) Because of errors in the data recording process. B) Errors are likely to be more randomly distributed. Because of population growth. C) Increases in productivity. D) Inflation.

D) Inflation.

Which of the following is not a way to estimate GDP? A) Spending. B) Production. C) Income. D) Interest rates.

D) Interest rates. (You can not measure GDP by the interest rate).

The Consumer Price Index: A) Records the price of all goods and services in the economy. B) Records the price of all goods produced in domestic economy, including exports. C) Measures the rate of inflation. D) Measures the general level of prices that consumers pay for goods and services.

D) Measures the general level of prices that consumers pay for goods and services. (It records the price of goods and services in a typical "shopping basket").

Which of the following statements is correct? A) In economics, money refers to the coins and notes in circulation. B) I can exchange my apples for your oranges. Therefore apples can be classified as money. C) Banks must exist for money to do its work. D) Money allows purchasing power to be transferred between consumers.

D) Money allows purchasing power to be transferred between consumers. (Money allows purchasing power to be transferred between people so that they can exchange goods and services, even when payment takes place at a later date (e.g. through the clearing of a cheque or the settlement of credit card and trade credit balances). This is the correct answer.

In the short run, successive additions to capital produce smaller and smaller increases in output. In the long run, however, GDP continues to rise. This is because: A) Workers work harder. B) Government policy encourages economic growth. C) Economies benefit from economies of scale. D) New capital equipment incorporates the latest technological developments.

D) New capital equipment incorporates the latest technological developments.

Which of the following statements regarding the multiplier is correct? A) If two countries were identical except for the share of credit-constrained households, then the country with the higher share would have a smaller multiplier. B) The multiplier is constant over the business cycle. C) An increase in exports leads to a higher multiplier. D) Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier.

D) Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier. (Some household income goes back to the government via taxes, and some is spent on goods and services produced abroad. These both reduce the effect of government spending on the domestic economy).

The relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force) is known as: A) The Philips Curve. B) The labor demand curve. C) The wage curve. D) The Beveridge Curve.

D) The Beveridge Curve. (The Beveridge curve shows the relationship between the unemployment rate and the job vacancy rate).

The widespread introduction of new technology into an economy takes time. The length of time between first appearance and general acceptance is known as: A) The innovation lag. B) The time gap. C) The knowledge lag. D) The diffusion gap.

D) The diffusion gap. (The 'diffusion gap' refers to the length of time required for a technological innovation to become 'diffused' throughout the economy).

In the expression for aggregate consumption C= C0 + C1Y, the term C1 is known as: A) Autonomous Consumption. B) The average propensity to consume. C) The multiplier. D) The marginal propensity to consume.

D) The marginal propensity to consume. (It normally take a value less than one, showing that an initial change in autonomous spending will initiate a series of changes of diminishing size).

In the context of aggregate demand, which of the following constitutes investment: A) Putting money in a savings account. B) Buying company shares. C) Buying a new car for personal use. D) Upgrading your firms' IT equipment.

D) Upgrading your firm's IT equipment.

Why do you think wages have grown at a much slower rate than productivity since the 1970s? How has this trend impacted income inequality in the United States?

I think there are many reasons why wages have grown at a slower rate than productivity since the 1970s. I think some of the main reasons is that there is more competition for jobs and that the government has applied fiscal policy in order to keep the inflation rate low. I think this specific trend has impacted income inequality in the United States because it just keeps getting harder to try to enter into a high paying job-one that will increase someone's economic status. These days, I feel like a lot of people are being pushed into high working, low paying jobs just so they will remain employed.

Describe the 'crowding out' perspective on fiscal policy in your own words. In your opinion, what are the strengths and weaknesses of this argument?

Many conservative economists are that if public spending is financed through borrowing, the increased government demand for loans will drive up interest rates, and this will "crowd out" private investment. (Some private investment projects that would have been profitable at lower interest rates would not be profitable at the higher rates, and therefore would not be undertaken.) Extreme versions of this theory, known as "dollar-for-dollar" crowding out, argue that the decrease in private investment will exactly offset the increase in government spending, and there will be no change in the overall output of goods and services.

Why might government spending create a larger multiplier effect when unemployment is high and have a smaller multiplier effect when the economy is at full employment?

Recall that a multiplier greater than 1 simply means that an increase in government spending results in an increase in total output larger than the initial spending increase. A multiplier of 1 would mean that an increase in government spending results in an exactly identical increase in total output. When the economy is at or near full employment, the multiplier is bound to be small. If all resources are already being used, the only way to produce more of some kinds of goods (say, tanks and war planes) is to produce less of some others (say, civilian cars), so total output will not have increased much if at all. However, when individuals are unemployed, the increase in government spending puts to use their previously unused labor, thus increasing total output by more than the initial increase in government spending.

What has contributed to the slowdown in growth during the 20th and 21st centuries? In your own words, describe both the supply-side arguments (from Gordon) and the demand-side arguments (presented by Friedman).

There are numerous reasons that have contributed to the growth slowdown during the 20th and 21st centuries. According to Gordon, the economic growth was created by important innovations such as engines, water, and even electricity. These innovations were more important and had a greater impact on the economy than others, thus making them the most important innovations. With this said, Gordon also states that due to the changes in technology and the growth in productivity, which leads to the overall decreasing output and wage growth. According to Friedman, the slowdown was a result of the shortfall in aggregate demand. In the government's efforts to restrict inflation, it actually decreases the number of jobs that are available which leads to an increased unemployment rate.